Free Money
By Tim Pierotti
Stability leads to instability. The more stable things become, and the longer things are stable, the more unstable they will become when the crisis hits.
Hyman Minsky
In October of 1999, my job was to hand out money, free money. I was on the Equity Capital Markets desk at Morgan Stanley. We were the Lead Manager and Sole Books for the Initial Public Offering of Sycamore Networks. Sole Books meant that while there were other underwriters, Morgan Stanley made all the decisions as to whom the stock would be allocated and where the offering would be priced. I was a pretty junior person on the desk so I didn’t make the decision of how many shares the big institutional players like Fidelity and Putnam would get, but I did decide which Dean Witter financial advisors would have a great day and who would go home miserable.
I don’t remember exactly how many shares I controlled, but let’s say it was somewhere in the neighborhood of 10,000 shares. That doesn’t sound like a lot until you consider that the IPO was priced at $38 per share and traded that day as high as $270 and closed at $184. It was “indicated” by our trading desk to be well over $100 before the opening trade and before the shares were allocated. Every 100-share allocation, which cost the customer $3,800 was worth $27,000 just a couple hours later.
Dean Witter, which had been recently bought by Morgan Stanley, had hundreds of brokerage offices across the country and in each office, there was a manager responsible for how the shares would be allocated among their advisors. Once I hit the button and released the shares to those managers, the panic, the screaming and the begging began. For every manager thrilled with their allocation, there were three that were despondent. “How can I tell my guys that their customers aren’t getting any shares?” The good news was that I could make a promise to get them on the next one. There was no top in sight. The momentum in tech stocks was so strong that our star internet analyst Mary Meeker did away with price targets altogether. The stocks were going through her targets so fast she decided to go with more of a “buy at any price” mantra. What a sign of the top that was.
There were more similar IPO’s for the next few months, many of them, until the crescendo peaked and collapsed five months later with the Nasdaq rising to 5000. Over the subsequent two and a half years, Nasdaq would drop by 78%, finally bottoming at just above 1100. Sycamore drifted down to $5 over that time period and would eventually be acquired by a company I had never heard of which was itself acquired by another company I had never heard of which was ultimately bought by Nokia. Nokia was another highflyer in those days. It has survived and today has a market cap of $22Bln which was exactly what Sycamore was worth for about an hour roughly 26 years ago.
The parallels to today are obvious. A company called Figma (no opinion) went public via IPO earlier this week at $33 and traded over $125 that day to reach a valuation of over $50bln versus a trailing revenue run rate of less than $1B. In fairness to Figma and today’s environment, that is a far more established business than Sycamore had in 1999. Beyond IPO’s the speculation and retail enthusiasm looks exactly like it did in 1999. On various metrics, tech valuation has only been higher once in history: the top in 2000
Just like then, there will be winners and there will be losers. But, just as the emergence of the internet drove the bubble in that era, the emergence of AI has driven this one. Just as with the internet, the economic productivity impact of AI will be profound, but how and when productivity plays out is unknowable. What we do know is that not all the highfliers today will survive. There will be creative destruction that eviscerates current dominant incumbent tech names. Who? I have no idea, but that outcome is capitalism's unavoidable truth. My point is not that the market is on the cusp of a crash. I do not pretend to have any insight as to how long the current enthusiasm will persist. But history rhymes and market manias have a well-established track record of leading to the eventual Minsky tipping point where stability and certainty beget instability and panic.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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